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A Very Bad Week for the Forced Arbitration Industry

July 23, 2009

It’s been quite a week (nine days actually) for the opponents of forced arbitration clauses in consumer contracts!

It all started on Tuesday, July 14, when Minnesota Attorney General Lori Swanson filed a lawsuit accusing the country’s largest and most notorious arbitration mill, the National Arbitration Forum (NAF), of “consumer fraud, deceptive trade practices, and false advertising.”  The core of Swanson’s 50-page complaint was that in spite of the NAF’s public claims of independence, it was actually part of the same corporate family as “one of the country’s largest debt collection enterprises,” which had provided it with 125,000 of its 214,000 debt collection arbitration cases in 2006.  We blogged about this here.

Then, on Sunday July 19, Swanson announced that NAF had agreed to get out of the consumer arbitration business altogether, and to accept no more cases after this week.  Although the consent judgment signed by NAF contained the usual boilerplate language that it “shall not be construed as an admission of wrongdoing or liability,” it is hard to imagine a more abject acknowledgment of their guilt than this almost instantaneous capitulation.

At the same time, Swanson also announced that she had sent a letter to the American Arbitration Association (AAA), the nation’s second largest consumer arbitration firm.  In this letter, after explaining why she believed that forced arbitration of consumer credit disputes was inherently unfair, Swanson asked the AAA to voluntarily leave the business.  Two days later, the AAA said that it would do so.

And then yesterday, July 22, the CEO of NAF, Inc. sat before the U.S. House Government Reform Committee’s Subcommittee on Domestic Policy, chaired by Rep. Dennis Kucinich.   The bald-faced lies in Michael Kelly’s short statement on behalf of NAF provided an interesting contrast to the carefully documented catalogue of egregious abuses that was presented not only in the written statements of Attorney General Swanson and of attorney Paul Bland of Public Justice, but also in a hard-hitting report prepared by the Subcommittee’s staff.

Satisfying as it is to see the industry’s worst single actor exit the stage, this cannot be the end of the story.  As Paul Bland noted:

The troubling practices in which the NAF engaged may well reappear before too long (perhaps with some of the same persons operating under some different institutional name).  So long as there is money to be made in debt collection arbitrations, arbitration providers will try to make it, even if their efforts mean that consumers are deprived of fair hearings.

There are two ways that Congress can end forced arbitration for good.  The first is to enact the Fair Arbitration Act of 2009, whose chief sponsors are Sen. Russell Feingold and Rep. Hank Johnson.  The second is by approving the President’s proposal to establish a Consumer Financial Protection Agency.  As previously noted here, this legislation authorizes, and even encourages, the new agency to prohibit forced arbitration in consumer contracts.

(Photo: mtellin)

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